Interdum stultus opportuna loquitur...

Saturday, September 25, 2004

A Typical Boring Friday...

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Federal Reserve Open Market Operations

The Fed's OMO desk didn't spike the punch last night; they only did a $3.75 billion overnight repurchase, all of it in Treasury-backed. That's well short of the $5 billion required to give da Boyz some spare intraday cash to goose the market up.

There was little "massaging" of the index futures at midnight; after a prety standard opening burst at 11:30 our time, they pretty much went nowhere until 12:45 or thereabouts - so the repurchase had little to do with what followed. What followed was mildly interesting, even though it was a Friday.

There was a flurry of program buy trade activity starting at about 12:45 a.m. our time, which took the S&P futures up 3 points but took almost half an hour to do so. The following hour saw a grind to right back where the program trading started.

Then, oddly (or perhaps not oddly) someone used the middle of the thin market trading at lunchtime to go on a buying binge. Would you be a large-scale buyer-at-the-offer when everybody else was at lunch?

Again, program trades were being fired, and the index shot back up... 3 points in 15 minutes, this time (because the market was so thin). And within an hour it had given back all of that, too - give or take a couple of ticks.

All things considered it was a pretty choppy day, but there was still signs that someone is pedalling furiously to hold this thing together.

Economic Statistics

As mentioned yesterday there were two sets of numbers out last night.

Durable Goods Orders came in worse than expected (recall, consensus was for the overall level to be unchanged.

As many of you will recall, I don't care about the headline number; all I care about is non-defense capex, ex-aircraft.

I ignore defence spending because defense spending in the US is driven by a corrupt nexus between the Pentagon and defence contractors, and therefore has almost nothing to do with general industrial conditions... and aircraft and transportation equipment is very "lumpy" and a large order for planes can cause a misleading spike in the headline number.

I've made that position clear for years now; the only number that matters is non-defence capex, ex aircraft. And last night's number stank - it fell 0.5%, further revealing Greenstain's "gaining traction" statement to be Orwellian hogwash.

The Bubble-heads and journalists focused on the "headline number excluding transportation equipment", and got all warm in the flute area - because the number looked good.

Overall capital goods fell 6.5%, but that was after a sharp drop in transportation equipment.

The other statistic: Existing Home Sales. These fell more than expected, dropping 2.7% to an annualised 6.54 million units.

Within the survey it shows that inventories represent a higher proportion of sales - the stocks of houses ("supply") has risen to 4.6 months of sales. Also, prices are softer in a lot of regions - the median house price dropped 0.1% (note that they never annualise falls in prices of assets... funny that).

Still, the recent strength in the bond market has helped edge mortgage rates downwards - mortgage rates now start at 5.75% for a 30-year fixed-rate mortgage. It's not going to help, long term... this market is going to be a massacre far worse than the Nasdaq slump which began in 2000.

Major US Indices

So it was Friday, and Fridays are always boring. Especially in the afternoon, when everybody's back from a 10-course lunch (9 pots and a packet of chips).

Speaking of chips, Phillips - the biggest maker of consumer electronics in Europe - warned that demand for semiconductors will be much lower than current expectations. That helped whack the Semiconductor Index to the tune of almost 3%.

By the end of all the sound and fury, not much had changed (unless you were long Semiconductor stocks from the previous session, in which case you're an idiot).

The DJIA gained 8.34 points (0.08%), closing out the day at 10047.24 points; interestingly the Dow did not manage ot make it back above 10100 - or even near that level - at any time during the session, although it only needed to rise by half its average daily range to get there. Not bullish.

The broader S&P500 gained 1.75 points (0.16%), finishing the session at 1110.11.

Over at Times Square, the Nasdaq Composite lost 6.95 points (0.37%), to close at 1879.48, while the larger-cap stocks fared a little worse with the Nasdaq100 losing 6.72 points (0.48%), to end at 1399.05 points. Under 1400 on the NDX (only just): not bullish.

The broader stock market measures gained: NYSE Composite Index gained 9.94 points (0.15%), closing at 6531.37, while the broadest measure of US equities, the Wilshire 5000 posted a gain of 17.4 points (0.16%), finishing the session at 10838.3 points.

NYSE Volume was moderate, with 1.26 billion shares changing hands, and Nasdaq Volume was below average, with 1.36 billion shares traded.

Nasdaq Composite1879.48-6.95-0.37%
NYSE Composite6531.379.940.15%
Wilshire 500010838.317.40.16%
NYSE Volume1.26bn--
Nasdaq Volume1.36bn--
US 30-yr yld4.8%0%0.02%

Market Breadth & Internals

On the NYSE advancing issues exceeded decliners by 1819 to 1454 for a single-day A/D reading of 365; the situation was reversed on the Nasdaq where losers outpaced gainers by 1538 to 1474; that margin is narrow enough to call it a draw.

NYSE advancing volume outpaced volume in decliners by 670.12 to 566.85 million shares; On the Nasdaq declining volume won the day handily, exceeding volume in advancing issues by 488.13 to 222.46 million shares.

Yet again it was a situation where the advance-decline numbers for the Nasdaq masked a pretty sever asymmetry in buying volume versus selling volume.

120 NYSE-listed stocks rose to new 52-week highs, and 25 posted fresh 52-week lows, while on the Nasdaq there were 50 stocks that hit new 52-week highs, and 36 which fell to fresh 52-week lows.

Advancing Volume (m)670.12222.46
Declining Volume (m)566.85488.13
New Highs12050
New Lows2536

Market Sentiment

There was a pretty marked decline in put trade last night, which was the primary cause of the drop in the Equity Put-Call Ratio; the PCR is now at a level which is neither excessively optimistic (too many calls) or pessimistic (too many puts). So from a contrarian perspective it offers no guidance.

There has been a welter of commentary lately about the VIX, and I've fallen for it myself, to an extent. The VIX is very low compared to its levels of 1999-2002 (when a reading under 20 was generally an indicator of a short-term top), however it's not providing useful trading guidance anymore... probably because too many people are watching it.

Still, there is a fundamental basis to the expectation that low implied option volatilities are indicators of excessive bullishness; the simple fact that it shows the willingness - nay, eagerness - of call buyers to bid up call option prices. That is a boon to call sellers. Call sellers are folks who are betting on a decline, and include a large number of institutions who are selling calls to hedge portfolios; institutional money is not always smart, but it's got a better idea than most of the nuffies who buy premium when it's expensive.

Anyhow, I just thought I should sound a wee note of caution given the buzz around VIX - we might be heading for a period of sustained low option volatility like we saw in the mid-90s, although I doubt it. I think there are folks whose attention spans are short enough that if the market doesn't drop 5% the day after VIX goes under 14, they think "this VIX thang don't work"..

Equity Call Volume1.58m0.05m2.98%
Equity Put Volume1.36m-0.15m-9.64%
CBOE Volatility Index14.28-0.52-3.51%
CBOE Nasdaq Volatility Index21.1-0.07-0.33%


Take a look at the yield curve (you will have to visualise the curve based on the table below... use the Force).

Think about these things:

  • Fed Funds is still at "emergency stimulus" levels;
  • 3 month bill yields are lower than Fed Funds;
  • the spread to 10-years from 3-month bills is giving very little compensation for deferred consumption.

Do those sound like things the bond market would produce if it thought things in the garden were rosy?

The entire yield curve flattened again last night, with yields rising along the curve but more concentrated at the short end. The yield on the benchmark US 30-yr bond rose imperceptibly, gaining 1 basis points to 4.8%, while the 2-year note yield added 5 basis points.

UST 2Y (yld)2.5630.052.03%
UST 5Y (yld)3.3180.0270.82%
UST 10Y (yld)4.0290.010.27%
UST 30Y (yld)4.8030.0110.23%
The Banks Index gained 0.66 points (0.68%), closing at 97.41; within the index,
  • the Derivative King - JPMorganChase gained $0.29 (0.73%) to $39.75; and
  • Citigroup gained $0.27 (0.62%) to close at $44.15

The Broker-dealer Index was virtually unchnged, adding just 0.2 points (0.16%), and ending the week at 125.41; the ticket clippers lined up as follows -

  • Merrill Lynch lost $0.20 (0.4%) to close at $50.40
  • Morgan Stanley Dean Witter gained $0.51 (1.03%) to close at $50.03
  • Goldman Sachs gained $0.41 (0.44%) to close at $93.48
  • Lehman Brothers gained $0.44 (0.56%) to close at $79.00

As mentioned above, the comments from Phillips hurt the the Philadelphia SOX (Semiconductor) index which lost 11.24 points (2.85%), finishing the session at 382.55

  • Triquint lost $0.12 (2.98%) to close at $3.91
  • Micron Technology lost $0.08 (0.64%) to close at $12.40
  • Intel lost $0.25 (1.23%) to close at $20.13
  • Altera lost $1.00 (4.93%) to close at $19.30
  • JDS Uniphase lost $0.08 (2.33%) to close at $3.35

Gold & Silver

Gold weakened by $1.90 (0.46%), closing at $407.80 an ounce. The Gold Bugs Index was basicalyl unchanged, dropping 0.14 points (0.06%) to 215.58 points.

Silver fell by $0.05 to close at $6.41 per ounce. The Gold and Silver Index (XAU) gained 0.23 points (0.24%), finishing the session at 96.3.

PHLX Gold and Silver Index96.30.230.24%
AMEX Gold BUGS Index215.58-0.14-0.06%


Oil was firmer, rising by $0.62 per barrel, closing at $48.90 per barrel; that was its high for the day, and its closing high for the week. It touched $49 the previous session, and is just 50c a barrel from its all-time high.

The Oil and Gas Index (XOI) gained 6.44 points (0.94%), finishing the session at 689.16 while the Oil service stocks (OSX) Index gained 2.34 points (1.98%), closing out the week at 120.39.

Reuters CRB278.2-1.8-0.64%
Crude Oil Light Sweet48.90.621.28%
AMEX Oil Index689.166.440.94%
Oil Service Index120.392.341.98%


US Dollar Index88.6-0.02-0.02%
Australian Dollarar0.714200.15%
Swiss Franc1.2609-0.0001-0.01%

European Markets

France's benchmark CAC-40 Index gained 20.41 points (0.56%), finishing the session at 3673.51; the German DAX-30 Index gained 4.64 points (0.12%), closing out the week at 3910.3; and in the UK, the FTSE-100 Index gained 9.8 points (0.21%), closing at 4578.1 points.